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Excerpts from the Confidential Client Edition
Analysis of Computer Science Corp. Third
Quarter FY04 Business Results
Good Quarter Gets Boos
Strong New Contract Sales, Weak U.S. Commercial Revenues
– Computer Science Corp.’s (CSC) executives should empathize with
Rodney Dangerfield. Wall
Street showed no respect for CSC following the release of its third
quarter of fiscal year 2004 results (Feb 11).
CSC shares dropped by more than 8% on Thursday and Friday despite a
good quarterly report. Adding
insult to injury, the humiliation happened the day the Dow and most of CSC
competitors’ shares thrived.
Who knows... CSC’s
latest earnings basically met analyst expectations, while the revenues
surged by 30%, boosted by last year’s DynCorp acquisition and by foreign
The best news, however, was the new contract sales. They more than tripled in the latest quarter, from $1.8 billion a year ago, to $6.0 billion. That’s a new all-time record for a single quarter.
Slowing Commercial Revenues
If there was a fly in CSC’s third quarter ointment, it was the U.S. commercial revenues. While the U.S. government business has been booming (up 30% in the quarter), the U.S. commercial revenues were down 5%. As a result, CSC’s global commercial revenues also declined 1% in constant currency (they were up 8% as reported).
No. 10 “Death Merchant”
In short, CSC has done a complete turn-about-face since 9/11.The company is now the 10th-largest Pentagon supplier, a big jump from the No. 21 position before the DynCorp acquisition.
Besides CSC (#10), EDS (#27), Dell (#35) and
IBM (#50) are among the Top 50 U.S. “death merchants,” based on the
Pentagon spending report for 2003 (see the Pentagon
Top 50 table)
Just in case you may be wondering if the 213% increase in CSC’s revenues from the Pentagon tops the top 50 list, it doesn’t. That dubious honor goes to vice president Dick Cheney’s former company – Halliburton. Despite the controversy over its over-charging the Pentagon for some of its oil deliveries in Iraq, this company recorded a whopping 711% jump in 2003 revenues.
The “Not-So-Free” Cash Flow
Meanwhile, back to CSC’s latest quarter, free cash flow, or lack thereof, is a legitimate reason for Wall Street’s worrying about the financial performance. During the first nine months of the current fiscal year, the free cash flow was a negative $173 million, more than double the corresponding amount a year ago ($85 million). As a result, CSC’s cash on hand dropped by over 50%, from $300 million as of March 28, 2003, to $148 million as of Jan 2, 2004.
Summary and Outlook
On balance, there seem to be at least as many
reasons to cheer the latest CSC report card, as there are to pan them.
Surging sales are bound to translate into growing revenues and
profits in the future. Yet
Wall Street has chosen to ignore the good and boo the bad.
As a result, CSC’s devalued stock price, even if it is still within 10% of its 52-week high, appears a relative bargain compared to its major rivals (see the table).
That’s especially evident in terms of the
Price/Earnings Growth (PEG) ratio, a forward-looking statistics measuring
a stock’s valuation against its projected growth rate (calculated as a
P/E Ratio divided by the 5-year expected growth rate).
The PEG Ratio makes
the CSC stock look like the best bargain, followed by Accenture, IBM and
EDS, in that order. So anyone
still booing CSC may be missing a good play in a global wartime economy.
"That's all she wrote," we're
afraid, for those of you who are NOT Annex
Research clients, and who are now
reading the complete Annex Bulletin (10
pages in print edition),
along with all charts which
back up our story. Qualified media
and friends of Annex
may request a TEMPORARY
User ID and Password by clicking
here and explaining why they wish to have access to this particular
Annex Bulletin. Or call Bob Djurdjevic at
"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (10 pages in print edition), along with all charts which back up our story.
Qualified media and friends of Annex may request a TEMPORARY User ID and Password by clicking here and explaining why they wish to have access to this particular Annex Bulletin. Or call Bob Djurdjevic at
To find our how you can become one of our clients, and read the rest of this and other Annex Bulletins, click on . Thank you.
Happy bargain hunting!
For additional Annex Research reports on EDS, check out...
A selection from prior years: Analysis of CSC calendar 2000 results (Mar 26, 2000), CSC's FY2000 Business Results (May 10, 2000), Business Is Humming Nicely (Nov 3, 2000), CSC 3Q2K, CIO Survey (Feb. 29, 2000), CSC: A Mouse That Roars? (Nov 1998)